China’s financial regulators fret about fintech’s power, and its risks to financial security. Here’s why
- China is the largest market for Big Tech credit worldwide, followed by Japan and South Korea
- Big Tech lending hit US$516 billion in China by the end of last year
Part three in a series on the future of China’s fintech industry, looking at the risks that prompted regulators to clamp down on lending. Earlier parts of the series are here and here.
“This huge, explosive innovation has gone far faster in a few years than what regulation and supervisory capacity can run,” said Agustin Carstens, general manager of the Bank of International Settlements (BIS), the Swiss-based monetary authority for global central banks, during a recent conference.
Online payment is the foundation of China’s fintech phenomenon, as customers leapfrogged credit cards and bank cheques straight to transactions via 900 million smartphones. By 2018, China’s fintech companies processed the equivalent of 38 per cent of China’s economic output in online payments.
The payments generate scads of user data from addresses to shopping habits that let fintech firms create more accurate assessments of borrowers’ creditworthiness than banks, allowing them to lend without asking for collateral. Ant’s non-performing loans averaged 1.3 per cent, lower than the 2 per cent average among China’s state-owned banks in September.
That makes Big Tech and their fintech offshoots the “monopolies in information,” in the words of the BIS’ Carstens.
MYBank’s technology is so slick that loans take less than three minutes to apply for on a smartphone, less than one second to approve, all done without human intervention.
Regulators say the troves of data that feed Big Tech companies’ algorithms pose a threat to privacy.
“We have to think [about] and regulate the usage of consumers’ private information for commercial purposes. That is a big challenge that worries me,” said Yi Gang, governor of the People’s Bank of China at a fintech conference.
Fintech firms lent US$516 billion in 2019, 42 per cent higher than the US$363 billion in 2018, according to China’s central bank.
“Some already think they are too big to fail,” the Hong Kong Monetary Authority’s chief executive Eddie Yue Wai-man said, referring to the common refrain during the 2007-2008 Global Financial Crisis when regulators were pilloried for bailing out banks on the brink of collapse.
Loan applications gathered by fintech platform are assessed and offered to banks in packages, which then conduct their own due diligence and decide whether to lend or not. The relationship is raising concerns about banks’ dependence on digital platforms to find borrowers.
China, the global leader in fintech, is again most at risk.
Banks’ heavy reliance on fintech is relatively new and unseasoned algorithms could also introduce risk into loan portfolios, said regulators. Regulators also fear that banks will not have collateral to fall back on if something does not go wrong with data-driven lending.
Algorithms can potentially introduce bias, barring swathes of borrowers from credit. Machine-learning tools can yield combinations of borrower characteristics that predict race, religion or gender. An algorithm may rate an ethnic-minority borrower at a higher risk of default because similar borrowers have traditionally been given less favourable loan conditions.
Regulators are also fretting about cybersecurity as finance shifts online, from defence against hackers and malware to outages caused by a heavy drain on electricity.
“We cannot afford mistakes or accidents” in this field, said Carstens. “The core of networks should be public goods and extremely resilient.”
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Regulators also fear some of China’s 7,227 microlenders might push high-interest rate loans onto those who can least afford them, such as students or farmers.
Illustrating the problem are the 20,000 members of Debtors’ Union chat group, each earning less than 6,000 yuan a month. Members borrow between 30,000 yuan to as much as 1 million yuan from credit cards and fintech apps, with the record holder owing 15 million yuan. Most have to rely on family and friends to bail them out.
Most fintech firms lend at cheaper rates than the banking industry. Credit-card rates are capped by the central bank at 18 per cent a year. Private loan interest rates above 36 per cent are deemed illegal.
Ant’s annual percentage rates (APRs) averaged 14.6 per cent, below the government’s 15.4 per cent cap for one-year private loans. Private loan interest rates above 36 per cent are deemed illegal. Lufax has lowered its APRs for new borrowers below 24 per cent. That said, other online lenders have charged higher rates.
Even though banks are partners with fintech firms, enough of them felt squeezed out for their grumbling to filter up to the bank regulator.
“Financial service providers have been excessively chasing profits, carrying out predatory lending, and using technology to mislead financial consumers” during the Covid-19 pandemic, said Guo Wuping at the China Banking and Insurance Regulatory Commission (CBIRC), who wrote that fintech’s credit services are akin to banks’ small loans, and should be regulated as such. “Regulatory arbitrage behaviour has occurred, and unfair competition with licensed financial institutions.”
Eight days later on November 10, antitrust regulators followed with another set of draft rules to look into potential monopolistic behaviour by Big Tech platforms.
“Financial technology companies use oligopoly status to charge excessive fees and increase the cost of financial consumers,” said CBIRC’s Guo.
Fintech is under intense regulatory scrutiny, and China’s role as a trailblazer puts the country’s fintech pioneers like WechatPay and Ant in focus.
F has started to close accounts at Ant’s Huabei and other apps. “When I can get the credit from these online apps, I spend freely and often spend more than I earn. I have to stop, and the best way is to cut off the credit.”
China’s regulators agree and are closing the spigot of online credit.